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The Week Ahead: Margins in the Spotlight as Retailers Report Holiday Results

So far it appears the Grinch got a little grinch-y this past holiday season, and that means margins will be a concern for the fourth quarter earnings reports.

Reports from J.C. Penney and Kohl’s indicate a not-so-healthy holiday period, and a growing concern that the Victoria’s Secret business owned by L Brands is failing to thrive. But even sales results in line with Wall Street’s expectations doesn’t necessarily indicate a retailer’s good fortune or health.

Urban Outfitters reported in-line sales Thursday, and November and December comps were up 3 percent. The Anthropologie division saw comps rise 5 percent, but that was down over a two-year stack. Free People comps were strong, up 8 percent, but its wholesale channel is still seeing challenges and key retail partners are pulling back on inventory buys. And the core Urban Outfitters business saw comps down 1 percent, indicating that the division slipped from late November when the firm reported third quarter earnings.

“Fourth quarter gross margin is now planned down more than the prior guidance of 200 basis points year-over-year, driven by higher markdowns in apparel, plus higher delivery and logistics spend to meet customer demand for quick shipping online,” Janine Stichter, equity analyst at Jefferies, said. “We sense the higher markdowns in apparel are reflective of a confluence of factors, including fashion misses in apparel [not to mention the deceleration in the retro brand cycle] and elevated inventory entering [the fourth quarter].”

The company’s total comp inventory was up 9 percent versus a 3 percent comp, including the 8 percent at Free People, the analyst said.

How bad could it get for retail?

One won’t know until the final numbers are actually in, but so far the trend doesn’t seem great for either struggling firms or those who are somewhat on the margin. In contrast, discounters and off-pricers are expected to report strong holiday results and fourth quarter earnings.

One problem for many retailers seems to be fashion misses, a possible slowdown in consumer spending could also be weighing on sales. And then there’s the stiff competition from emerging direct-to-consumer brands.

More retailers are likely to detail next week, and in the ones that follow, just how well their holiday season went. The real story will come from digging deeper past the numbers and looking closer at their margins.